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Home , Colorado Party (Uruguay), Liberal Party (Paraguay), Lino Oviedo, Nicanor Duarte, Paraguay

Order Code RL34180

Paraguay: Background and U.S. Relations

September 20, 2007

Nelson Olhero Research Associate Foreign Affairs, Defense and Trade Division Mark P. Sullivan Specialist in Latin American Affairs Foreign Affairs, Defense and Trade Division : Background and U.S. Relations

Summary

The demise of the long-ruling Stroessner in 1989 initiated a political transition in Paraguay that has been difficult at times. Current President Frutos has implemented some reforms that have addressed corruption and contributed to economic growth. Yet, due in large part to the country’s authoritarian past, Paraguay’s state institutions remain weak while corruption remains ingrained in the political culture, impeding democratic consolidation and economic development.

The April 2008 presidential elections could serve as a test of the strength of Paraguay’s democracy since the faces the possibility of losing its dominance after 60 years in power. At this juncture, the opposition is divided between support for former Catholic priest and former General . U.S.-Paraguayan relations have been strong, with extensive cooperation on counterterrorism and counternarcotics efforts. For additional information, see CRS Report RL33620, : Evolution and Implications for U.S. Trade Policy and CRS Report RS21049, : Terrorism Issues. This report will be updated as events warrant. Contents

Introduction ...... 1

Political Situation ...... 1 Corruption ...... 3 2008 Presidential Elections ...... 3

Economic Situation ...... 4

Relations with the ...... 5 U.S. Aid...... 5 Counternarcotics Cooperation ...... 6 TBA and Terrorism ...... 6 Paraguay: Background and U.S. Relations

Introduction

Paraguay – a landlocked American country bordering , and – has a population of 6.5 million predominately concentrated in and around the of Asunción. The majority of the population is of mixed Spanish and Guaraní Indian descent. Both Spanish and Guaraní are the official languages, with over 90% of the population fluent in Guaraní. Paraguay’s per capita income in 2005 was $1,280, one of the lowest in , and over 40% of the population live in poverty.

Political Situation1

The current political context in Paraguay has been shaped by the country’s turbulent political history. In the late 19th century, a two-party system emerged with the formation of the Colorado Party and the , but the Colorado Party soon became the dominant political force, ruling between 1887 and 1904. Paraguay was defeated in the War of the Triple (1864-1870) against Argentina, Brazil and and lost 25% of its territory and over half of its population. This defeat led to an extensive period of political instability, with three civil wars in the first half of the 20th century and a war with Bolivia between 1932-1935, the War, that further weakened political institutions and hindered economic development. The Liberals ruled from 1904 until 1940, until the military assumed control with a succession of authoritarian leaders.

The Colorado Party returned to power in 1946, and has remained in power until the present day, making it the longest-ruling in the . In the late 1940s, the party began to assume greater control over state institutions and the bureaucracy to the point where party membership was a prerequisite for civil service positions and promotion in the military, further perpetuating the Colorado Party’s dominance.

General , who was a member of the Colorado Party, staged a coup in 1954, and consolidated power in a repressive military dictatorship that lasted 35 years. The key to the Stroessner regime’s longevity was an alliance among

1 Sources for the historical information in this section include Diego Abente Brun, “Uruguay and Paraguay: An Arduous Transition,” in Jan Knippers Black (ed.), Latin America: Its Problems and Its Promise, Cambridge MA, Westview Press, 2005; and Paul C. Sondrol, “Paraguay: Precarious Democracy” in Howard J. Wiarda and Harvey F. Kline (eds.), Latin American Politics and Development, Boulder Colorado, Westview Press, 2000. CRS-2 the military, dominant economic groups, and the Colorado Party. The military regime was characterized by strong political repression, the personalization of authority, ultra-nationalist and anti-communist rhetoric, and widespread corruption. With democratic advances occurring in other South American countries, Stroessner ultimately was overthrown in a 1989 coup and fled to Brazil, where he lived until his in 2006. In 2004, a Truth and Justice Commission ultimately was set up to investigate human rights abuses that occurred under the Stroessner regime.

The overthrow of the Stroessner regime initiated a process of democratization, with the enactment of a new constitution in 1992 and competitive elections held for the first time in 1993. Despite the democratic transition, however, many characteristics of the country’s extensive period of military rule have persevered. Although opposition parties have held a majority in , the dominance of the Colorado Party has remained intact, including its control over the state apparatus. The political culture has remained a product of the country’s authoritarian past with pervasive corruption and clientelism. Nascent democratic institutions have been weak and almost every post-Stroessner President has faced some legal troubles.

In 1996, Commander General Lino Oviedo revolted after President ordered him to step down. Oviedo resigned, but attempted to run in the 1998 presidential elections as the Colorado Party’s candidate. Oviedo’s candidacy was nullified after the Supreme Court upheld his conviction and ratified a 10-year prison term for his barracks revolt. Oviedo’s running mate, Raúl Cubas, was elected President in 1998 and defied the Supreme Court by freeing Oviedo from prison as one of his first acts in office. This action led to the initiation of impeachment proceedings against the President, and intensified the rivalry between Vice President Luis Maria Argaña and President Cubas and Oviedo. Argaña was assassinated in 1999 and blame was placed on both Cubas and Oviedo, sparking widespread demonstrations and violence in Asunción. President Cubas was forced to resign, and both he and Oviedo fled the country. As a result, Luis Gonzalez Macchi, the president of the Senate, completed the presidential term and attempted to establish a government of national unity, but constant infighting within the coalition led to a weak government that was marred by corruption and inefficiency.2

Nicanor Duarte Frutos of the Colorado Party (National Republican Association or ANR) was elected president on April 27, 2003, defeating Julio César Franco of the opposition Authentic Radical Liberal Party (PLRA, related to the original Liberal Party) as well as three other candidates in an election that observers judged to be and fair. The Colorado Party also captured 37 seats in the 80-member , the largest block, and 16 of 45 seats in the Senate, while the largest opposition party, the PLRA, won 21 seats in the and 12 seats in the Senate. Three smaller parties won the remaining seats. During the campaign, Duarte portrayed himself as a strong leader, and he promised to implement widespread institutional reforms, prioritize the fight against corruption and establish a transparent government. As discussed below, President Duarte has enacted reforms that tackle tax evasion and corruption. Since his election, however, the President’s popularity has declined because of public concerns about rising crime and unemployment. As

2 Brun, p. 576. CRS-3 a result, he has resorted to more populist rhetoric as a means of retaining support for the Colorado Party.

Corruption

Observers maintain that corruption remains a major impediment to the emergence of stronger democratic institutions and sustainable economic development in Paraguay. President Duarte’s measures to combat corruption have included increased penalties for tax evasion and other measures to increase tax revenue, greater oversight of , and a crackdown on the trade of contraband and counterfeit goods. He also removed members of the Supreme Court after corruption allegations surfaced against them. These measures have been partially successful, as evident in Transparency International’s 2006 corruption perceptions index in which Paraguay ranked 111 out of 163 countries.3 This ranking was an improvement from 2004 when the country was classified among the six most corrupt countries in the world and the second most corrupt in the Western Hemisphere.4 The opposition, however, has claimed that anti-corruption efforts have not been far-reaching enough because they have not addressed the clientelism that is pervasive in Paraguayan politics or the dominance of the Colorado Party in governmental institutions.

2008 Presidential Elections

President Duarte sought to overturn the constitutional ban on consecutive re- election so that he could run in the April 2008 presidential election. The opposition strongly contested the President’s move, however, and he abandoned his re-election efforts. Duarte supports former education minister Blanca Ovelar as the Colorado Party’s presidential candidate. Ovelar will compete against current Vice President Luis Castiglioni for the party’s nomination, as well as candidates representing other factions. A party primary is expected to be held in December 2007.

At this juncture, it appears that the opposition’s support is divided between two potential candidates: Fernando Lugo, the former Roman Catholic Bishop of an impoverished rural diocese, and former General Lino Oviedo, the leader of a failed 1996 coup who was released from prison in early September. Until Oviedo’s release, Lugo had been the frontrunner in the polls, and his candidacy was endorsed by several left-wing labor unions and social organizations and parties. This included the endorsement of the PLRA, the main opposition party. Lugo’s political discourse emphasizes empowering the poor and putting an end to endemic corruption, which he views as emanating from decades of Colorado Party dominance. A complicating factor for Lugo’s candidacy, however, is that the has not yet ruled if he is eligible to run. Paraguay’s constitution prohibits members of the clergy from running for public office, and the Vatican has rejected Lugo’s resignation and petition for laicization.

3 Transparency International, Corruptions Perceptions Index 2006. 4 “Glimmer of Success in Paraguay’s Corruption Battle,” Financial Times, August 14, 2006. CRS-4

Oviedo, who had returned to Paraguay in 2004 to serve his 10-year prison sentence, was granted conditional release on September 6, 2007, and indicated his desire to be a presidential candidate if court rulings permit him. Oviedo is the founder and leader of the National Union of Ethical Citizens (UNACE), a political party which he ran from prison. In the aftermath of Oviedo’s release, a poll showed Oviedo with 31.5% support compared to 27.5% for Lugo and 27.2% for the Colorado Party candidate. Some observers, including many in the opposition, believe that President Duarte orchestrated Oviedo’s release in order to split the opposition and improve the Colorado Party’s chances of retaining power. In the aftermath of Oviedo’s release, Lugo announced a new electoral coalition known as the Patriotic Alliance for Change (APC).5

Economic Situation

The Paraguayan economy, which remains heavily dependent upon its traditional agricultural exports of , cotton, and meat, grew by 4% in 2006. Economic growth is forecast to reach 3.7% in 2007. Paraguay lacks significant mineral and petroleum resources, but possesses vast hydroelectric resources, including the world’s largest hydroelectric generation facility, the Itaipú , built and operated jointly with Brazil. Remittances from Paraguayans living abroad have significantly contributed to sustained economic growth. According to the Inter-American Development Bank, remittances totaled some $650 million in 2006.

Paraguay experienced an economic recession for several years in the aftermath of a succession of bank failures from 1996 -1998 that wiped out half of Paraguay’s locally owned banks. When elected in 2003, President Duarte inherited a government that had defaulted on $138 million in debt, primarily as a result of low tax revenue.6 Under President Duarte, the economy rebounded, due in part to the implementation of reforms that include anti-corruption initiatives, which have increased revenue, strengthened institutions, and created a more favorable environment for foreign investment.

Paraguay is heavily influenced by the economic conditions of its larger neighbors, Argentina and Brazil, which are fellow members of the Common Market of the South (Mercosur).7 As one of the smaller countries of Mercosur, Paraguay has complained that its exports face significant restrictions entering Argentina and Brazil. Paraguay’s industrial sector is still largely underdeveloped, with much of the population still employed in subsistence agriculture. Economic growth tends to be limited by Paraguay’s imports of manufactured goods, as well capital goods that are

5 “Poll Shows Oviedo Favourite in Paraguay,” LatinNews Daily, September 17, 2007; “Elections Blown Wide Open as Oviedo Freed,” Latin American Weekly Report, September 13, 2007. 6 Michael Thomas Derham, “Against All Odds,” LatinFinance, , 2005. 7 Mercosur has the goal of implementing a common market among its members, but to date only a limited customs union has been achieved. CRS-5 necessary to supply the industrial and investment requirements of the economy.8 This has led to a widening of the country’s trade deficit, estimated at $1.1 billion in 2006.

Paraguay’s informal sector is very large, estimated at about half of the country’s , and is estimated to employ over 40% of wage-earning workers.9 A significant part of the country’s commercial sector consists of importing goods from the United States and Asia for re-export into neighboring countries. Most of these imported goods are not declared at customs, preventing the government from obtaining substantial tax revenue. Counterfeit trade and smuggling are prevalent in the country’s regions.

Relations with the United States

Paraguay and the United States have good relations, cooperating extensively on counternarcotics and counterterrorism efforts. The United States strongly supports the consolidation of Paraguay’s democracy and continued economic reforms. President Duarte is viewed by many observers as very pro-U.S. and became the first Paraguayan to be received at the Oval Office. The United States is Paraguay’s eighth largest trading partner, with trade increasing over the last four years. U.S. imports from Paraguay totaled about $58 million in 2006 while in the same year, the value of U.S. exports to Paraguay was over $910 million, according to Department of Commerce trade statistics. The protection of intellectual property rights (IPR) has been a U.S. concern, especially piracy, counterfeiting, and contraband. The Duarte government has made significant efforts to improve IPR protection, but the United States Trade Representative maintains that the country continues to have problems due to its porous border and ineffective prosecutions.

U.S. Aid

The United States provided about $13.3 million in aid to Paraguay in FY2006 and an estimated $11.7 million in FY2007. For FY2008, the Administration has requested $9.7 million in assistance, including $1.3 million to support child survival and health, $4.7 million in development assistance and nearly $3 million for a program. Development assistance includes support for projects that promote export diversification and private investment, as well as projects that aim to combat corruption and strengthen institutions. In past years, Paraguay had faced restrictions in terms of receiving Economic Support Funds (ESF) and International Military Education and Training (IMET) assistance because the Paraguayan government has not signed a bilateral immunity (Article 98) agreement that would give U.S. soldiers immunity from International Criminal Court prosecution. In the fall of 2006,

8 Luis Carlos Nino, “Inflation Increases Slightly as Paraguay’s Trade Deficit Widens,” Global Insight Analysis, June 4, 2007. 9 Richard Lapper and Adam Thompson, “Cash-Starved City in Paraguay Fights War on Counterfeit Goods,” Financial Times, September 9, 2005; and “Latin America and Caribbean, A Barrier for Development,” States New Service, May 23, 2007. CRS-6 however, President Bush waived the Article 98 restrictions for IMET and ESF for Paraguay.10

In addition to regular foreign assistance funding, Paraguay signed a $34.65 million Threshold Program Agreement with the Millennium Challenge Corporation in May 2006, with the funds targeted specifically at programs to combat corruption. Paraguay also signed an agreement with the United States in 2006 under the Tropical Conservation Act that provides Paraguay with $7.4 million in debt relief in exchange for the Paraguayan government’s commitment to conserve and restore tropical in the southeastern region.

Counternarcotics Cooperation

Paraguay is a major transit country for illegal drugs destined primarily for neighboring South American states and Europe. The Chaco region in the northwestern part of the country is a major transshipment point of illegal drugs, along with the tri-border (TBA) with neighboring Argentina and Brazil. A 1987 U.S.- Paraguay bilateral counternarcotics agreement was extended in 2006. U.S. counternarcotics efforts in Paraguay have focused on providing training, equipment and technical assistance in order to strengthen the capacity of the country’s National Anti-Drug Secretariat (SENAD), along with initiatives to help combat money laundering and corruption. The United States is assisting in the completion of a helicopter pad and support facilities that would increase SENAD’s capacity to disrupt trafficking networks. According to the State Department’s March 2007 International Narcotics Control Strategy Report, SENAD arrested several major Brazilian drug traffickers and in 2006, carried out drug seizures that inflicted an estimated financial loss of $39 million to narcotics traffickers.

TBA and Terrorism

The United States is particularly concerned about illicit activities in the TBA, where money laundering, drug trafficking, arms smuggling, and trade in counterfeit and contraband goods are prevalent. Such activities thrive in the tri-border region due to porous , a lack of surveillance, weak law enforcement and pervasive corruption by local officials, especially in the Paraguayan border city of . The United States has worked closely with the governments of the TBA countries on counterterrorism issues through the “3+1” regional cooperation mechanism, which serves as a forum for discussions, and the United States has provided anti-terrorism and anti-money-laundering support to Paraguay.

For a number of years, the United States has had concerns that the radical -based Hezbollah and the Sunni Muslim Palestinian group have used the TBA for raising funds among its sizable Muslim communities by participating in illicit activities and soliciting donations. Nevertheless, according to the State Department’s annual terrorism report for 2006 (issued in April 2007), there is no

10 For background, see CRS Report RL33337, Article 98 Agreements and Sanctions on U.S. Foreign Aid to Latin America, by Clare M. Ribando. CRS-7 corroborated information that these or other Islamic extremist groups have an operational presence in the TBA.

The State Department’s terrorism report states that Paraguay did not exercise effective immigration or customs control on its borders, and that although Paraguay is generally cooperative on counterterrorism efforts, its judicial system remains severely hampered by a lack of strong anti-money-laundering and counterterrorism legislation. In May 2007, Paraguay’s Chamber of Deputies approved a bill that would incorporate a clause on terrorism in the country’s penal code, making terrorist association and the financing of terrorist activity punishable crimes. In August 2007, however, Paraguay’s Senate delayed the bill because of concerns that its definition of a terrorist act could lead to legitimate social protests being labeled criminal acts.